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Workers at Ludwigsfelde Daimler-Mercedes plant.Doug Saunders/The Globe and Mail

Euro zone manufacturing put in its worst performance in the three months to September since the depths of the Great Recession, with factories hit by falling demand despite cutting prices, a business survey showed on Monday – pointing to a new recession.

Factories helped lift the 17-nation bloc out of its last recession but the survey suggests a downturn that began in smaller periphery countries has taken root in core members Germany and France.

"Despite seeing some easing in the rate of decline last month, manufacturers across the euro area suffered the worst quarter for three years in the three months to September," said Chris Williamson, chief economist at data collator Markit.

"The sector will act as a severe drag on economic growth. It therefore seems inevitable that the region will have fallen back into a new recession in the third quarter."

Markit's Eurozone Manufacturing Purchasing Managers' Index (PMI) rose to 46.1 in September from 45.1 in August and above the preliminary reading of 46.0. But that was its 14th month below the 50 mark that divides growth from contraction.

The output index rose to 45.9 from August's 44.4 but chalked up its seventh month of decline.

The euro zone escaped from the last recession in 2009 but a debt crisis that began in Greece almost three years ago has wreaked havoc across the region and threatened to bring the whole currency union crashing down.

A slew of weak data has convinced many economists that the bloc fell into another recession in the quarter just ended and will not grow again until early next year.

In its battle to support a struggling economy the European Central Bank is now widely seen in a Reuters Poll cutting interest rates to a new record low of 0.5 per cent before the end of the year.

However, inflation jumped more than expected in September, flash data showed on Friday, which may discourage the ECB from acting this week although the PMI survey showed factories cut the prices of their products for the fourth straight month.

New orders have fallen since June 2011 and factories were forced to generate some of their activity by running down backlogs of work.

The new orders index fell to 43.5 from the previous 43.7. Manufacturers have cut staffing levels for all but one of the last 11 months, giving an indication of their pessimism.

Official data due later on Monday is expected to show unemployment rose to 11.4 per cent in August.

Earlier figures from Germany, Europe's largest economy painted a picture of sustained contraction. In France the situation worsened dramatically with its PMI seeing one of the biggest one-month falls in the survey's 14-year history.

"France is perhaps the new worry, with its PMI slumping to the lowest for three-and-a-half years," Mr. Williamson said.

Italy and Spain, the third and fourth biggest economies in the bloc, both saw their PMIs remaining firmly in sub-50 territory.

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